History teaches us that there are invariably multiple new investment themes and trends which emerge from a fundamental period of dislocation and doubt such as the one we are living through presently.
Analysis, schmanalysis
Right now, negative news abounds from the banks, the housing market, the service sector, on the jobs front, on corporate earnings growth. Last week-end the IMF revised downwards its forecast for worldwide growth for 2008, but you got the distinct feeling that they are as much searching for straws as they are doing hard & confident analysis of the current and future state of the world’s major economies. No one knows if the US will avoid recession, and least of all, I would suggest, the IMF. Equally, no one knows whether the much-discussed decoupling theory – that the world can grow even when the US is in recession – has much or any validity.
Pushing on a string?
Arguably the single biggest question currently is whether the very dramatic moves by the US to counter the mounting recessionary threats will have any effect. As the Fed funds rate has literally plunged through the floor, we have seen a dramatic reversal of the yield curve, the spread between the 2 year and 10 year US Treasury Bond. Observing the relationship over the last 15 years offers some clues as to where we might be in the evolution of the current recession / slowdown.
In the 90-91 recession, the curve steepened well after the recession had technically ended, whilst in the 01-02 recession most of the steepening occurred prior to the end of the recession.
Of course, no two recessions are the same, although they do tend to share some similarities. Superficially, this one seems to echo the early 90’s experience, when one of the main catalysts was a major crisis in the US Savings & Loans industry (basically building societies, US style).
The point is that, whatever the headlines, and whatever the well rehearsed & serious systemic problems that are undoubtedly part of the cause of the current crisis, sharply steepening yield curves don’t persist forever, and neither do economic downturns.
Follow the sage…
For investors then, who don’t get paid for intricate macroeconomic analysis or sitting on their hands well beyond the point of maximum opportunity, this is a classic time to be seeking out solid investment opportunities. Witness Warren Buffett, who invariably only really gets busy in such times. If it’s time for him to go to work, surely it might pay us to turn away from the endless gloomwatch, and return to old-fashioned tyre-kicking.
It’s an irony that when the big picture noise is at its loudest and most pessimistic, it is usually the time to return to bottom-up analysis of company fundamentals. The companies that are thriving in this environment, and whose share prices are giving tell-tale signs that they are more than holding their own, despite the downturn, these are the names to be adding to your wish list. Then add patience and the passage of time, and you have the ingredients of a future investment strategy, looking beyond the current gloom and despair.
Dane Halling, Director, Investment Research, at Arcturus Investments. The opinions expressed are his own and do not necessarily reflect those of his company. No recommendations are implied by publication of this text.
27 February 2008